I Love Software as a Service

The other day as I typed a post on Vox, i noticed something that hadn't been there before. Suddenly there was a dotted red line under my presumably misspelled word. The day before, I needed to click on the spell check button to find all the words I had inevitably misspelled. Now I had an inline spell checker. A week later I noticed a similar dotted red line in a message I was typing on LinkedIn. Inline spell checking on LinkedIn as well. Fantastic. The best thing about it was that I didn't have to do anything to get the new feature. The software was updated and suddenly these services were better than before.

A lot has been made of the power of the software as a service business model. The enterprise software sales model is a challenge. Once you've met your numbers in any given quarter, it is off to the races selling for the next quarter. While there have been a number of wildly successful companies selling software licenses quarter after quarter, software as a service gives much greater predictability of revenue. By tracking a few simply metrics -- cost of customer acquisition, growth rate, and attrition -- it is possible to determine just how successful a service will be. And by tweaking any one of those metrics, you can drastically change the profitability of an online service. Predictability is music to the ears of VC and entrepreneur alike.

But as fantastic as it is having greater predictability of revenue, I think that the product benefits of software as a service are what make the model truly compelling. Take, for example, PayCycle, a small business payroll service I invested in some time back. When I first invested in PayCycle, the team was just building the first version of the service. They had to make tough decisions about what states to roll out first, what features to build for each state, how to implement direct deposit, how to automate Federal and State tax payments, etc. With each new release of the software, the service reached more people, had richer features and was easier to use. Now tens of thousands of small businesses use PayCycle to do their payroll every month and they can bank on the service getting better and better as the development team continues to mature the service. The same story could be told of Salesforce, Facebook, Typepad, YouTube, NetSuite, the list goes on.

The beneficiaries of the service architecture are the end users -- simply log in and get a better service than the day before. But this capacity to rapidly innovate also leads to greater revenue as attrition is driven down to single digits and lower over time. Ultimately, software as a service is a win-win for end users and startups alike. I have no doubt that I will be investing in interesting software services for years to come and look forward to watching the ones in which I have already invested continue to thrive.

UPDATE: As the commenters below rightfully point out, the inline spell checker I praise is not actually a result of service updates. It is a result of a fantastic browser update, namely Firefox 2. Thank you Mozilla for your ongoing innovation. I guess Vox and LinkedIn were tackling other features that will be coming soon to a browser near year. Which is precisely why I still love software as a service.

David,
SaaS rules. I wrote some thoughts about this phenomenon you describe of being uniquely able to "have your ear to the rail" and propagate enhancements to all customers in near realtime after reading Clayton Christiensen's "Innovator's Solution." It's like his example of the situational vs. attribute-based assessment and being able to alter the flavor of the milkshake or the form factor of its container while it's in your customer's hand. That post is here if you're interested -> http://www.scrollinondubs.com/?p=35

The one problem with SaaS is that certain situations and applications must be run inhouse for privacy and connectivity issues. We just launched a new technology called "JumpBox" last week that meshes the benefits of SaaS and onsite deployment. Check it out on JumpBox.com - I think you would be interested in this concept of "onsite SaaS."

Good piece. The beneficiaries of SaaS are clearly the customers who get more upgrades, more collaboration, and less friction.

Not so much the providers, perhaps, with SaaS per se. "The enterprise software sales model is a challenge. Once you've met your numbers in any given quarter, it is off to the races selling for the next quarter." I think it's just the same at Salesforce, WebEx, RightNow, Successfactors, and all the rest, if you sell SaaS beyond VSB (very small businesses). Especially if you are public.

If you are totally VSB focused with instant conversion (TypePad and PayCycle), and there's no real sales cycle, then sure the model is different. But perhaps not so much b/c it's SaaS per se, more because you acquiring VSBs via an internet lead-to-close sales process.

Here are some practical issues with SaaS: It does not work for all applications; in fact most applications. The ones you see as successes; Sales Force, RightNow, Webex all have some characteristics that point to why they are successful and why other applications will not be as SaaS services: Their degree of independence from other applications within the company - like accounting, CRM, Mfg, Warehousing, etc. Sales Force Automation or hosting a web conference is fairly independent of other applications and so work easily. Handling customer calls as in RightNow is also a good SaaS application. For small and medium sized companies that do not want to deal with ANY application it will work well. Others will have a mish-mash of some inhouse applications and some hosted. It will be royal mess!

How do I know? I was the CTO of three small companies that tried to use SaaS applications as much as possible- works for some, does not work for many.

As for the revenue models also, iam not so convinced. You should sell a whole lot of $50 a month per person deals to make up what it costs to develop and maintain these applications, especially in the U.S.

Let's wait for the verdict to be in! I don't think it is in yet, sadly. SaaS is very convenient and useful as a model. Question is whether it actually works for companies?

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